Transfer Pricing

Context

At the BRICS Heads of Tax Authorities Meeting in New Delhi (September 2026), India highlighted the burden of transfer pricing disputes on developing countries and proposed greater cooperation on international taxation and transfer pricing.

What is Transfer Pricing?

1. Transfer pricing is the price charged for goods, services or other transactions between related entities of the same multinational group, such as a parent company and its subsidiaries operating across different countries.
2. It is regulated to prevent artificial shifting of taxable profits between countries through manipulation of transaction prices.

Arm’s Length Principle (ALP)

1. Arm’s Length Price (ALP): The price that would be charged in an open-market transaction between independent, unrelated buyers and sellers under similar conditions. India’s tax laws require international related-party transactions to comply with this principle.

1. In India, the Income Tax Act, 1961 applies the ALP to specified international transactions between associated enterprises to prevent improper shifting of taxable profits.

Significance of Transfer Pricing

1. Profit Allocation: Helps MNCs determine the income and expenses of different entities within the same group.
2. Tax Compliance: Provides a framework for determining the taxable income arising from cross-border related-party transactions.
3. Global Operations: Facilitates transactions between parent companies, subsidiaries and other related entities operating in different countries.
4. Tax Risk Management: Properly regulated transfer pricing helps reduce tax disputes and profit-shifting risks across jurisdictions.

Concerns

1. Base Erosion and Profit Shifting (BEPS) Risk: Manipulation of related-party prices can facilitate profit shifting to lower-tax jurisdictions and erode the tax base of countries where economic activity occurs.
2. Complexity in Valuation: Determining the appropriate Arm’s Length Price for intangible assets, specialised services and unique transactions can be difficult.
3. Tax Disputes: Differences between MNCs and tax authorities over profit allocation and pricing methods can lead to prolonged cross-border disputes.

BRICS and Transfer Pricing

1. Tax Cooperation: India-led BRICS Working Group on International Taxation and Transfer Pricing promotes cooperation on treaty interpretation, transfer pricing audits, Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAP).
2. Global Tax Rules: The initiative supports developing countries’ participation in multilateral tax negotiations, including the UN Framework Convention on International Tax Cooperation.
3. Capacity Building: BRICS tax cooperation also focuses on digital tax administration, institutional capacity and knowledge-sharing.

FAQs

Q1. What is transfer pricing?
Ans: It is the pricing of transactions between related entities of the same multinational group.

Q2. What is the Arm’s Length Principle?
Ans: It requires related-party transactions to be priced broadly as they would be between independent parties.

Q3. Why can transfer pricing create international tax disputes?
Ans: Different countries may disagree over how much profit from an MNC’s cross-border activities should be taxed in their respective jurisdictions.

Q4. How is transfer pricing linked with base erosion?
Ans: Manipulation of related-party prices can shift taxable income between jurisdictions, potentially reducing the tax base of countries where economic activity occurs.